For almost two hours, the CBN governor, Sanusi Lamido Sanusi, who clocked one year in office last Friday, spoke exclusively to THISDAY board of editors in his Abuja residence last Sunday. Sanusi, who says he has no regrets for all the decisions he has taken so far, gives reasons for the credit crunch, the recapitalisation of rescued banks, his relationship with President Goodluck Jonathan, efforts to reduce operations cost of banks, so as to allow them bring down interest rates as well as efforts to bailout manufacturers and ailing airlines, which are heavily indebted to banks. He also stresses the need for reforms in the power sector, which has continued to increase the cost of doing business. Excerpts:
What Impact do you think the CBN Reforms have had on the banking sector and the financial services industry?
Very often people talk about the impact of the reforms whether it is negative or positive and I have always said that the reforms are ongoing process. I think that what we are doing is a continuation of what we met and we will leave it somewhere and some people will come and continue. There are many dimensions to reforms and there are certainly needs for something to happen. Governor Soludo had a 13 point agenda, consolidation was number four, there are other items in that agenda, unfortunately they were not pursued with the same vigor given how far consolidation had gone. This included things like improved transparency and disclosure in financial statements, improved risk management in the industry and risk supervision, consolidated supervision and so on.
At the point I became governor; the financial system was facing the risk of a major crisis or even collapse. There were questions on the real estate and distribution of margin loans and banks that were permanently at the CBN discount window - clearly unable to pay their debts. There was question about the extent of exposure to all marketing links, given the fact that oil price had crashed from $147 per barrel to $40 per barrel and also given the fact that the stock market had lost about 70 percent of its value. So, I became governor at a very difficult time. The rate of inflation was 10 to 15 per cent, there were serious crisis of confidence in the local currency, the official exchange rate was about N145-146 but the Naira was traded at the market for N190 to $1, which is an indicator of where the confidence was. There was a drying up of credit in the interbank market, the Monetary Policy Rate (MPR) was only 8 per cent but banks were lending money to each other overnight at 22 per cent, which tells you the perception of risk in the industry. We had banks with lots of liquidity packed up in the central bank getting 2 per cent, they didn’t want to give the money to other banks, so you had the market segmented into two - some banks had excess liquidity but they were not giving other banks because they did not trust the banks given the condition that they knew.
So, the first task for me as an incoming governor was to sort out the macroeconomic framework and the interbank market of naira and foreign exchange before we even bring down the interbank rate was critical. That was why in our first MPC meeting, we made some changes to the rules by allowing banks to pledge funds, discount it and cut back as part of liquidity ratio. We also guaranteed the interbank market and when we did that within a few weeks, we were able to bring down the interbank rate from 22 to about 10 percent, which is where they should have been given the fact that the MPR was eight. We also rapidly removed a number of restrictions that had been placed on foreign exchange and that stabilised the Naira and led to convergence. I think from August last and now we have reduced the spread between the official rate and the parallel market rate to fewer than 50 per cent. Now we then had to face the bank reforms and I think the story has been told of what we found. We put in sufficient money to ensure that people don’t lose their money and we then took out the management that we believe had mismanaged the banks and handed them over to the law enforcement agents. So, the first achievement is that one year down the line, not a single depositor has lost their money and not a single creditor has lost their money. We have gone through this entire crisis, averting the crisis, taking the actions that we took without jeopardising the interest of the primary stakeholder in the banking system.
The second impact is that we have been able to make and take decisions that regulators had been previously unable to implement. In December 2008, the banks were supposed to have had a common year-end but when they put pressure on the regulator, they backed out. We have made banks to adopt a common year-end in 2009, there was pressure and resistance from the stock exchange and government as well as all sorts of stories in the newspapers about how common year-end was affecting the capital market but we implemented it. The common year-end had improved the quality of information that we are getting, there was a section of the code of corporate governance that said that non-existing directors have to stay for 12 years and we have enforced that. So, we have shown that we have a regulatory capacity for implementing difficult decisions even if the operators do not agree to the decisions, we have changed the mindset of banks and we have seen some humility now - where bank CEOs begin to respect the institutions and processes more and are held totally responsible for lapses. We have changed the mindset of banks from seeing themselves as agencies for profiteering and speculations to actually see themselves financial intermediaries, which should be looking actively at avenues for directing liquidity and capital into the real economy. I think in general, we have brought to bear a more collaborative and professional approach to managing the financial system. I know from outside it looks like the central bank governor dictating but if you talk to the managing directors, they will probably tell you that the Bankers’ Committee now are more interactive and spends less time talking. So, collectively we work out the direction of the industry.
You recently spoke at a lecture in Kano where you encapsulated the four basic aims of the banking reforms. Would you say they have been achieved, especially the last one on getting banks to support the real sector of the economy against the backdrop of the ongoing credit crunch?
I think we should not mix up issues; there are many issues like the credit crunch and lending to the real economy. Let’s first get some financial perspective in the credit crunch issue because when you listen to some analyst in Nigeria, you will hear Nigeria is the only country that has credit crunch due to the action of the central bank governor. We have credit squeeze in America and nobody is blaming the Fed for that. We have a credit issue in the UK, nobody is blaming the FSA or the Bank of England. In South Africa year-on-year banking growth was negative. So, when I read that the credit crunch is as a result of the banking reforms, it shows a superficial understanding of how credit works and frankly it is just ignorance. Two things we need to understand about credit is that like any other thing, it is driven by demand and supply. The demand for credit is a derived. In economics you know as a result of needs, you don’t eat money, you borrow if you have something to do with it that is profitable enough for you to pay back your debt and service it and keep something for yourself. That is how commercial credit works. Now if the real economy is growing, the demand for credit grows, credit can go in two ways. It can go into income creation and income redistribution. What has happened in Nigeria in the last few years was that we had rapid income redistribution. When you lend money and go to the capital market and the demand for shares pulls up the price of shares and the borrower is able to sell shares and pay you back your money and makes profit, yes, you have credit growth. But you have not created income because if the price of shares moves up from N20-50, you have not succeeded in created wealth but you have just redistributed it. The sucker who bought the share at N50 has simply taken part of N50 and giving it to the man who bought at N20 and when the market crashes that person, who bought at N50 has his income wind up. So, overall, we are not better off than we were before just that some people who were able to take advantage of the market or manipulate the market have become billionaires and there are hundreds of thousands of people who have been totally impoverished – especially those who sold their houses and borrowed to come to the market. That was the kind of credit crunch that we had. I have said it and you can check the numbers; credit was growing at 50, 60 and 70 per cent per annum for two-three years. What was Gross Domestic Product GDP growth? The rapid growth in credit did not feed into the GDP growth and this tells you something - it was never going into the real economy. The real economy has to absorb credit for the credit growth to have a multiplier effect on GDP. So, the first thing we must understand is, one of the principle ways of achieving credit growth is really not a central bank monetary policy issue but a fiscal issue. What are the constraints in the real economy? We need to unlock structural bottlenecks in the economy and power is one it. It is the largest single obstacle to the growth of the real economy in Nigeria, it has stopped manufacturing from growing, led to the very high cost of doing business in the country and it has contributed to security issues.
We need to have a right price of incentive for producers and investors when we talk about charges in power. If the charges are good, investment goes into that area - just like the deregulation of petroleum products. We are talking about incentives for genuine businessmen to go into those areas not people who are able to manipulate the subsidy system. When we talk about protection of our industries from competition, there must be incentives because you will either provide a tariff regime that protects our industries or provide protections. I know what I say doesn’t sound like economic orthodoxy but in Washington today, there is a small business council that spends $3billion every year subsidising America’s small businesses. George Bush protected US industry from competition, in Europe there are subsidies for agriculture and so we need to create a macroeconomic policy environment, which is really government fiscal policy that will allow the growth of the economy and that is when the manufacturers will come in. But if you don’t do that, you are not going to have the demand in the real economy and so what happens? We go back to where we were in 2005-2007 where banks get all these liquidity when the real economy is not growing and they take the liquidity to speculative activities in either the stock market or in real estate. Now, what we have today is that I have stopped the banks from doing that business but has that really stopped them from going to the real economy? No, go and look at the numbers because as at 2008, less than 2 per cent of total credit given by Nigerian banks went to Small and Medium Scale Enterprises (SMEs). We (CBN) have the numbers and as at 2008, less than 1 per cent went to agriculture and so when people talk about banking reforms stopping credit flows in the economy, you ask where was the credit and how many people were really getting credit before.
But there is one aspect of the credit squeeze that is related to what we have done or rather what the banks have done because when banks have bubble capital or bad loans, they are responsible for the consequences of those actions and this is what you get when you mismanage institutions. Banks took huge loans from the capital market and to oil and gas and it went bad. Capital was wiped out. From December 2008 to December 2009, when you compare the figures, the banking industry lost over 60 per cent of its capital, which is what determines the ability of the bank to lend money. If you say you have a capital of N100 billion, in theory you can build risk weighted asset of N1trillion, if it turns out that your capital is only N30 billion, what then is happening is that the loan book carried by Nigerian banks was far in excess of what it should have been, given the real capital. Some banks did raise capital during consolidation but there were a number of banks that did not raise capital. They recycled depositors funds. I have always given examples and they are now public knowledge and are matters in the court of law. Thirty per cent of the share capital of Intercontinental Bank is held by their subsidiaries, fictitious companies and was financed by the depositors’ funds. So, you now have an idea of what the bank’s capital was and do you know what, this is exactly what happened in Iceland. Banks failed in Iceland because half of the capital of the banks was financed by depositors’ funds. So, it is not a uniquely Nigerian thing, it has happened in different places and we have seen it happen and the consequences of what happened.
On the real economy, am sure you know that in December last year we had a meeting with the different bank CEOs. We’ve been meeting with state governments and have been working on how we can move credit to the real sector. We at Central Bank have provided SME guarantee to allow banks to lend to the real economy. We are starting a project with the Agra and Bill Gates Foundation called the Nigerian Incentive-based Risk Sharing System for agricultural lending that seeks to address some of the problem in agric lending.
In the last one year, were there some decisions you have taken that you think you ought not to have taken or would have done better?
No, I have no regrets and I will tell you why. People have different ways of looking at life, the way my brain works, I understand that it is always thinking with the benefit of hindsight, to look back and they say with hindsight everyone has 20-20 vision. It’s very easy one year down the line, you turn around and say maybe you shouldn’t have done this. What is important from holistic perspective is that at the point that we (CBN) takes decisions, we take these decisions based on the information available to us, the best advice we are able to get and with the best interest of the country at heart. If today there is a problem just like the credit crunch, you will address the problem but if you take it back to August when I was about to take these decisions, did I know there was going to be a credit crunch? Yes I did, I knew that there was no way you will stop banks from declaring false profit, pretending that there was no bad loans, compel them to recognise bad loans and the banks will pay for them. I knew and my duty is to address the problem. You can ask the government, I told them that in the next few months when we make the banks provide their bad loans, they will not be able to grow credit, government has to spend money, this was the basis on which the central bank supported the release of the excess crude fund to state governments because I knew that credit flow will be impacted by the reforms. So, will I now sit down and say that because there is the credit crunch, I regret making the banks cut their losses, no I don’t have any regrets. I do not know if you understand what am saying because everything I did was based on my consultations with professionals at that point in time and I have no regrets at all.
So, what is the next stage in the reform process?
To be honest, you know this reform work keeps coming up. Reform is an ongoing continuous process, for me I think consolidation was part of the reform, what we are just doing is completing the process, and correcting errors of the past. When I go out of this office, somebody else will come and correct errors that he thinks I have made in the past and build on that.
But you are being accused of not having your own agenda?
No, but if I read the 13 point agenda and am satisfied with it, why do I have to come up with a different agenda? if I am improving corporate governance, disclosure and professional practice in the system, capacity building, industry infrastructure such as what we discussed with the banks this weekend (last weekend) - talking about industry shared services to reduce cost of doing business, why do I have to come up with a different agenda? If you read the 13 point agenda , they are all in one way or the other linked and you see banking is not about rocket science, everybody knows what it takes to run a good bank. Its just that some parts of the 13 points were given much emphasis and in my view, the lack of emphasis on other parts undermines that. There is nothing wrong with banks having a lot of capital, but when you have capital and consolidation, you must realise that you have created institutions that are becoming too big to fail, as you move from 89 banks to 25 banks, you have moved from the era where you can have 13 failed banks and have a system.
That is now history. if you have 13 failed banks in Nigeria now, you don’t have a banking system, that means risk management and risk based supervision, governance, should have been given greater emphasis like the others and we are doing that. So, we are not weakening the banks, we are simply building on the qualitative aspects as they were on the quantitative. People talk about whatever you say, but I have come up with a comprehensive paper that is right now in our website. Right now, the United States is just going through blueprints two years after the reforms. When you are faced with a banking crisis, it’s not the time to start writing theoretical papers, you deal with the crisis. Even the Asset Management Company was contained in the 13-point agenda but it was not just pursued the way it should have been because if you have 24 banks, you need to have instruments in your hand for addressing financial distress situations. At the time we were facing the financial crisis, there were only two options available to me, either lend them money or liquidate them. I cannot take capital in the bank, so that loan cannot be equity today.
We are pushing through amendments that will allow the next governor of the central bank when faced with a crisis like this, to take equity. I cannot do that until the amendment is through. We are pushing through an amendment to the board to allow the central bank governor get a court order to merge institutions without going through Annual General Meeting (AGM) because if I had those powers we wouldn’t have lasted one year. We could have done short-term measures by bailing the institutions and then shareholders can come and argue for the price at which it was done and make the adjustments. But the issues of taking decisions would have been held, so in terms of having the legal power for a proper resolution framework, we did not put that in place. But nobody can say it was not written or it was not conceived just like the AMC. When I became governor, I got the draft of the bill that had already been put up but its just that the draft did not meet anywhere near our requirements. So, we just had to pull it back to improve on it to address some of the issues and then go forward with the AMC. And so, with this paper, I concluded in my view that these are the eight things that went wrong and these are the ways to address them. When you look at them, though I don’t claim originality some of the mistakes were universal banking in Nigeria and it’s time to look at it again.
Some of your critics say you are just reeling out numbers and not focusing on the economy. What is your reaction to this?
Who said that and what exactly do they mean? What is it that the central bank has not done in managing the economy? The central bank is responsible for monetary stability, exchange rate stability and financial system stability. Which of these have we not done? We have controlled inflation, we have exchange rate and systems stability. Inflation was 16 per cent when I became governor but its now 12 per cent. I can bring down inflation to a single digit by starving the system of money, but we have taken the decision that at this point in time - we can live with a lower double digit inflation and not risk economic growth because if interest rates go up sharply, you kill the capital market recovery and slow down the banking resolution. Many of the banks that are making profit today are doing so because we have brought down the cost of funds in the market, yet people complain that they are not getting high savings but it has continued to push back the risk of the failure of banks because it has brought down the cost of fund and has given them liquidity and profit. Many of the people that studied Economics don’t understand it.
Somebody said to me that the naira is overvalued and I said in relation to what? But he doesn’t understand and does not know the meaning of devaluation and how it works or depreciation. He doesn’t know the conditions under which adjustments in the value of the currency can affect balance of payment but he just talked. We have been joggling four balls and we have joggled them very well but Nigerians want to have low inflation, low interest rates, a strong naira and high foreign reserve. But you can’t have all, its basic economics and we have in the last four years maintained the balance. We still have 17 months import, why do you want to have $56billion in reserves and wipe out your manufacturers because of excessive imports? The exchange rate has provided an anchor of expectation to manufacturers and investors and to be honest, if you are manufacturer, you really don’t care if at the point of starting out, the naira is at $150-200. You will raise the funding but what you want to know is that if you import your raw materials and manufacture your goods or if you import your finished goods and sell, by the time you come to replay, it does not move by 20 per cent and that’s what you want to know. Therefore, stability is very critical, you factored the rate of inflation and you know that you are at 13-15 per cent and that the central bank will not let the inflation go to the upper double digit and you have factored that into your pricing decision. So, we have anchored expectations in times of crisis with half of the banking industry gone and you think the interest rate are just there and it is not deliberate and that the interbank rates have been flat. Who brought down the interbank rates? Why do you think we have been extending guarantee or we just enjoy talking about it. We have managed the money market rate, watched the exchange rates and that has led to the recovery of the capital market, so what is it in the economy that we have not done?
Two prominent Northerners (National Security Adviser, Alhaji Aliyu Gusau and Sultan of Sokoto, Alhaji Saa’d Abubakar III), have faulted your reforms. What are your comments?
First, when people speak about policy, I don’t think of them as northerners or southerners. The sultan is not an Economist neither is the NSA. Whether they are northerners or southerners is totally immaterial, some of them speak based on what they are told and some on incomplete information. Given the family I come from, I will never reply the Sultan on the pages of newspapers. I was with the Sultan a few days ago up until 1am. We had a family discussion with each other, details of which I will never make public.
You instituted the banking reforms during the administration of late president Yar’Adua and you got strong backing for reforms from him. Do you still get that political will to continue with the reforms?
As for Yar’Adua, I always say that I did not know the late president. I had never met him and I had no relationship with him until he invited me in March last year and then again in May and told me he wanted to make me to be the central bank governor. I will remain eternally grateful to him for all the support he had extended to me and I think we have lost a great leader. People have different views and everybody judges by what they see. In July, when we were auditing banks, I told the president that we had not seen the reports yet but indications have it that the problems are much deeper and when the audit came out and we decided to take action. I met him and showed him the reports - that these are the five banks that are in crisis and that there are easy options. But remember that in leadership, I have always believed that the easy option is always the wrong one and that the easy option, which the Nigerian government have always done is to declare these banks as failed banks and hand them over to the Nigeria Deposit Insurance Corporation (NDIC) for liquidation. By following this path, Nigerians will lose their money, shareholders will lose their money, the bankers will walk away smartly, and one year from now, they will be governors, ministers, captains of industries, senators and ambassadors.
But the people who borrowed the money will become big and the NDIC will not have the capacity to pursue them and I think that will be wrong. But our recommendation is to take a second route, which is difficult and the route is to authorise me to put in as much money as I deem fit to make sure that these banks don’t go down and then give me the support to recover as much of that money as we can and that will mean going after people who have borrowed money and refused to pay, people who have done insider related credit, prosecuting people for criminal activity and these are rich and powerful people. You have friends and party members, they will come to you through emirs, obas and generals and they will attack you in the pages of the papers. So there is nothing new and am not surprised at them but that nobody has shot a bullet at me because that was a possibility. Some people said they will try to eliminate you physically and I knew that very clearly in August when the president said go with your recommendation and I told the president that I wouldn’t want to stop in between the process when they come to complain to you and he assured me of his commitment. Until he (last president Yar’Adua) died, he never interfered with my work and that is the man.
The most significant challenge was when we got to a bank where his family had significant shareholding, BankPHB. Yar’Adua was on the board of the bank before he became a governor, his nephew was also on the board and his mother was living on the dividends of the shares inherited from her son Shehu Yar’Adua. Things got so bad that people told the mother that I wanted to take over Shehu’s bank and that was the level of pressure he was under. People who are close to him spoke to me in a manner that depicted he was not happy and we all went to see him in his office with all the people that claimed to know his position. But the president told me in their present that what I had started has brought a good name for the country and that I should continue with the same yardstick for every banks and from this perspective, I saw a great leader willing to put the interest of the country before his own.
As for President Jonathan, in the last few weeks that the country has gone through the transition and I have given the president some space because having taken over the country at this state, I believe that he has far more important things to contend with. As long as things are going on well in the banking industry, he has to sort out continuity. But am actually going to see him this evening (last Sunday evening). The Dr. Jonathan that I know right from his days as the vice president, was privy to key decisions that we took while the reforms were being initiated and I have always briefed him to make sure that he is aware of what we are trying to do. But there are people who make mischief that sources from the villa has disclosed that the president is not happy.The central bank governor does not need to read about what the president thinks because he tells him direct and I have not received any form of invitation from the president on any changes and the way I relate with the president is that if he does not tell me, I will not accept anything from anybody in the name of the president. So, do I have political support, yes I do. Do I have any form of relationship with him, I don’t think anybody has apart from the people who knew him closely before now and that is the reality. He just became my boss and it took me months to build a relationship with Yar’Adua, it will also take a little while to build the relationship with him.
Wema Bank and Unity Bank were given up to June 30th to recapitalise. What are the progress reports on these banks?
I am aware that Unity Bank has gone ahead with their right issue and am also aware that Wema Bank has reached an advanced stage in discussion with investors. We are going to wait until the end of the month to see how far they have gone. Unfortunately, they have delayed in the approval of the AMC bill but that means some aspect of the money has been taking care of. Our thinking was that at the end of March the bill would have been taking care of some aspect of the toxic assets and help these institutions move towards recapitalisation. We will wait and see so as to know what kind of extension is needed. But from what I hear, they probably will not need a longer extension.
But it appears investors are not interested in the rescued banks?
When you are doing mergers and acquisition discussions, you don’t come out in the newspapers and announce. There isn’t a single bank out of the rescued banks that does not have two or three partners discussing with them. You have not heard it in the public because we have managed it very well. Foreign banks were interested at the beginning. When we tell people that these banks were badly managed they carry stories that we were trying to sell the banks to foreigners. All we were trying to do was to try and encourage them to come into the banks and nothing more. You would be shocked that some of them looked at the banks and said they could not believe that banks were managed like that and they walked away. Some of them came to me and said we are sorry governor, the banks are very bad. We encouraged them to give us terms and conditions that will help them consummate a merger and I think for most of the banks we will get the deals done by end of the third quarter because it is becoming clear to me that we will get the AMC bill passed into law by the end of June. All the due diligence that is being done on the banks will be concluded by the middle of July. I mean we are now in detailed due diligence stage, by the middle of July we will have a clear picture of who they have chosen as their preferred partner. I am sure that by August you will see a number of deals announced in the market.
What is the status of shareholders in the rescued banks?
I am glad you asked that question because I think it is important for shareholders to know that we (CBN) have save depositors and that everything we are doing between now and the rest of this year is to save shareholders, because really, the shares they held are longer worth the papers they are written. Their shareholding has been wiped out. What the banks did was to take depositors money and bet on the stock market, oil and gas and in some cases, stole the money and that has wiped out the banks’ capital. But now some of that money will come back through the AMC, where you have bad loans that have collateral in form of shares or tangible security, we would buy those loans back based on the collateral. But not loans that no longer have book value but loans that have values that we think can be remedied and can be realised from the collateral in the long-term. But if that money is not enough to take them to a stage where the banks are ready for a merger, AMC is empowered to inject money. And these securities could be common stock or we could do some tier two capital if the other party says - look I have enough capital for the banks and then we negotiate. So, the AMC will put in the money and own those securities. What that means is that instead of ending up with nothing, you will end up as a minority shareholder in an enlarged institution and you therefore retain the prospect of recouping your investment as the banks make profit in the future. But we would have to invite shareholders to an AGM and you would have to vote to sell loans to AMC, to give capital to AMC and to merge with bank A or B. You have a right as shareholder to vote against it but what you need to understand is that if you go to the AGM and decide to vote against it, I will have no option than tell the world that shareholders did not give us any other choice but to liquidate those institutions. There are many ways we can do that, we could either declare them as failed banks or we could move them to NDIC to sell the assets and liabilities under purchase and assumptions. Either way, the shareholders will end up with nothing. But when we go into purchase and assumption or bridge bank we can still save depositors. We have guaranteed creditors and depositors anyway, so they have no problem.